Dilzer Consultants - Investments and Financial Planning

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Retirees- Regular Income options

Retirement is what all busy youngsters look forward for! ! Hoping we have peace of mind and relaxation and plenty of free time.

Which are the best investment options that can give higher returns for retired individuals? This article would provide some insights about good investment plans for Senior Citizens

Pradhan Mantri Vaya Vandhana Yojana 

Let’s start at evaluating the pros and cons of the LIC Pradhan Mantri Vaya Vandhana Yojana

a new Annuity plan by LIC .

  • This pension plan would provide immediate pension of 8% on the invested amount.
  • This is single premium pension plan.
  • Minimum age of entry is 60 years
  • No Maximum age of entry. Means, any one above 60 years can join without any restriction.
  • Pension plan is for 10 years tenure.
  • Minimum pension plan payable is Rs 1,000/Monthly, Rs 3,000/Quarterly, Rs 6,000/Half Yearly and Rs 12,000/Per annum.
  • Maximum pension plan payable is Rs 5,000/Monthly, Rs 15,000/Quarterly, Rs 30,000/Half Yearly and Rs 60,000/Per annum.
  • One needs to invest Rs 7.5 Lakhs to get the maximum pension of Rs 5,000 per month.
  • Pension amount would be directly credited to SB account.
  • If Pensioner commits suiside during the tenure of pension plan, nominee / legal heirs would get the entire purchase price of the pension plan.
  • This plan is administered and run by LIC of India.
  • Pensioner would get loan upto 75% of the purchase price during the tenure. The interest on the loan would be deducted from pension amount.

Disadvantages

× Major disappointing thing in this plan is no Income Tax Benefits available. One would not get any tax benefits on the invested amount. Also no income tax benefit on the interest received. The pension amount received is taxable in the hands of the pensioner.

× No easy liquidity. One can liquidate this policy only under exceptional cases like medical treatment for specific diseases. If there is any emergency requirement to withdraw invested amount, it is not possible in this policy.

× 8% returns would be low considering inflation and price increase in future.

× Max Pension of Rs 5,000 per month is low in the current living world. This amount would not be sufficient even for medicines that may be required during such old age.

× Maximum Rs 5,000 Pension per family (including all family members) makes this plan unattractive. If one old aged husband and wife expect 5K pension for each member through this plan, it is not possible.

Other Annuity Plans

The government has completely authorized LIC under norms of IRDA to design customized plans for senior citizens security. Some of them can be taken in early years to gather corpus for the pension.

Jeevan Akshay

 The LIC Jeevan Akshay policy entitles the insured to buy an annuity plan at the young age, thus entitling him/her to receive annuity for the rest of the life. However, there is an option to buy the short term annuity also such as for 5 years, 10 years, 15 years or 20 years.

The minimum purchase price of policy is Rs. 1,00,000 while the minimum age of entry is 30 years. For every Rs. one lakh, the pensioner is entitled to receive Rs. 4,630 to Rs. 6,490 if the age of pensioner is 30. For a 40-year old pensioner, the annual annuity is anywhere between Rs.5,010 and Rs. 6,820. The policy can be surrendered if the pensioner is diagnosed from any critical illness or he is being migrated to another country permanently. The policy can’t be used to raise a loan.

Jeevan Nidhi 

The insurance plan offers deferred annuity on expiry along with the death cover. Unlike the PMVVY, Jeevan Nidhi can be purchased at a young age such as 30. The policy doctrine is that you keen depositing the money in regular intervals (annual) and keep building a corpus throughout your life. And as you grow old, you stand to receive an annual pension (also known as annuity).
From the sixth year onwards, the insured is also entitled to receive extra bonuses.
On the expiry of the policy, the insured has the option either to buy an immediate annuity or to purchase a single premium deferred pension product.
This means, if an insured is entitled to receive Rs. 5 lakh from LIC at the time of expiry of the policy, the insured can either buy annuity for Rs. 5 lakh that will give him a fixed sum every year (say Rs. 50,000 for next 10 years)

Post Office Senior Citizen Montly Income Scheme (MIS)

Senior Citizen Saving Scheme is a Govt. of India product for Senior Citizens of above 60 years which offers 8.4% interest rates. Since safety is most important point for senior citizens and this is a scheme offered by Govt. of India, it is safe investment option for Senior Citizens which offers highest interest rates.

  • Any individual who attained 60 years and above can open SCSS.
  • Individual who has attained the age of 55 years or more but less than 60 years, and who has retired, can open the account within a month of the date of receipt of the retirement benefits and proof of date of disbursal of such retirement benefit(s) along with a certificate from the employer.
  • Retired personnel of defence services irrespective of age limit can open this account with certain conditions.
  • Eligible Senior Citizen can open multiple SCSS accounts with various banks. However maximum total deposit cannot exceed Rs 15 Lakhs.
  • Current interest rate is 8.4% per annum (as on May-2017). This would be reviewed by Govt. of India every year and can modify the rate.
  • Interest would be calculated and credited by end of the calendar quarter i.e. on 31st March, 30thJune, 30th September and 31st December.
  • Tenure of SCSS is 5 years. Depositor can extend this for 3 more years upon request.

Disadvantages

× There is no wealth tax on SCSS. However interest on SCSS is taxable. Senior citizens need to pay income tax on this interest as per income tax applicable to them. Banks would deduct TDS as per their rules ( (a) 10% if you submit PAN card and 20% without PAN card and (b) Zero tax if you submit Form 15H for senior citizen).

× No withdrawals are permitted within 1 year.

×  If one want to withdraw after 1 year, but before 2 years, 1.5% of the deposit amount would be deducted as penalty.

×  If one want to withdraw after 2 years, but before maturity of 5 years, 1% of the deposit amount would be deducted as penalty.

Monthly income Plan (MIP) Mutual Funds

  • Dividends are not guaranteed: As per existing guidelines, a mutual fund can pay dividends to unit holders only in the presence of a distributable surplus and not from the capital it holds. 
  • Exposure to Debt as well as Equity Market: As mentioned earlier, MIPs are invested in both debt and equity markets with debt investments accounting for a major portion of the portfolio.
  • Exit Loads and Additional Expenses: Mutual funds in India no longer feature an entry load after the practice was abolished by SEBI; however exit loads still apply to a range of funds including MIPs. Most monthly income plans feature exit loads of around 1% in case you decide to redeem or switch your units before completion of 1 year from the date of allotment. 
  • Balance of Risk and Return: The conservative or risk averse investor might feel ill at ease when investing in a plain vanilla equity fund (too risky!)
  • Tax : At present dividends from monthly income, plans are tax exempt for the investor. However, they are subject to dividend distribution tax of around 30% which is payable by the mutual fund house to the relevant government agency. Thus, in case the fund house declares a Re. 1 per unit dividend, approximately Re 0.30 per unit is payable to the government by the fund house as dividend distribution tax. This cost is passed on to the investor as part of the expense ratio of the fund.

Dividends from MFs

  • can be used as a source of income for the retired, Though the dividend received is tax-free, it comes to you after a heavy 28.84 per cent (25 per cent tax + 12 per cent surcharge + 3 per cent cess) dividend distribution tax on debt fund and 10% on equity funds.
  • Instead of the dividend option, investors can now switch to a Systematic Withdrawal Plan (SWP). These plans allow systematic withdrawal of money at specific time intervals starting from monthly to a yearly period.
  • A big advantage which investors can derive by opting for Mutual Fund SWP is that they are tax efficient. No tax is deducted on these withdrawals; additionally the actual tax liability is much lower than the interest earned from bank FDs.
  • Mutual Fund SWPs’ provide the assurance of getting a fixed amount regularly. Sometimes, if the fund cannot generate sufficient profits, you might have no dividends to be paid. Hence every month you will have different amounts coming in and some month there might be no money received. SWP is a definite boon in such a scenario.
  • Taxation of Mutual Fund SWP: Even if you have to pay Long term/short-term capital gain on the sale of his investment, it will be better than paying for the dividend distribution tax (DDT) of 13.5%. Things get better in case of Mutual Fund SWP from equity funds. As the long term capital gains from equity mutual funds are exempt in case of holding beyond a year, you end up paying no tax on the withdrawals.

Bank Fixed Deposits 

Interest rates between 6.5% to 8% per annum

All banks offer higher interest rates to the senior citizens of India.

This makes this investment lucrative as this is the safest and most guaranteed mode of investment. There are a several senior citizen fixed-deposit schemes to choose from with many varied features attached like interest payouts, loan facility, over-draft facility, flexible tenure, etc. Banks offer different rates of interest ranging between 6.5% to 8%.

The interest rates are offered best in the tenure of 1-5 years. The highest rate of interest on senior citizen FDs is being offered by IDFC bank, which is 8% for 366 days.

Some banks may allow customers to open this account at the age of 55 years who have taken VRS. The interest earned on FD would be liable for income tax based on the income tax rate applicable to them. The senior citizens may opt for different interest payout options (Monthly, Quarterly or Yearly) to get a regular income.

Tax-free bonds

Tax-free bonds, although not currently available in the primary market, can also feature in a retiree’s portfolio. They are issued primarily by government-backed institutions such as Indian Railway Finance Corporation Ltd (IRFC), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation Ltd (HUDCO), Rural Electrification Corporation Ltd (REC), NTPC Ltd and Indian Renewable Energy Development Age and most carry the highest safety ratings. One may, however, buy and sell them on stock exchanges as they are listed securities.

Also, keep  note of a few things before investing in tax-free bonds. One, they are long-term investments and mature after 10, 15, 20 years. Invest in them only if you are sure that you will not require the funds for such a long period. Second, the interest is tax-free therefore there is no Tax Deducted at Source (TDS) too.

So it is always best to diversify across different investments rather than invest in this scheme if you have the right help to manage your own portfolio. This is also advisable as the returns offered on these immediate annuities are low and risk free in nature.

Sneha Ram

Dilzer Consultants Private Limited

 

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